<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _______ to _______
Commission file number 0-15903
CALGON CARBON CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 25-0530110
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 717, Pittsburgh, PA 15230-0717
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(412) 787-6700
---------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 27, 1998
----------------------------- -------------------------------
Common Stock, $.01 par value 38,948,760 shares
<PAGE>
CALGON CARBON CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 1998
The Quarterly Report on Form 10-Q contains historical information and forward-
looking statements. Statements looking forward in time are included in this
Form 10-Q pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in the future to
differ from performance suggested herein. Specific examples of such
uncertainties include references to future cost savings associated with
restructuring charges as well as estimated costs from Year 2000 compliance. In
the context of forward-looking information provided in this Form 10-Q and in
other reports, please refer to the discussion of risk factors detailed in, as
well as the other information contained in the Company's filings with the
Securities and Exchange Commission.
I N D E X
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PART 1 - FINANCIAL INFORMATION
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Item 1. Financial Statements
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Page
----
Introduction to the Financial Statements............. 2
Consolidated Statement of Income and
Retained Earnings.................................... 3
Consolidated Balance Sheet........................... 4
Consolidated Statement of Cash Flows................. 5
Selected Notes to Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Results
------ -----------------------------------------------
of Operations and Financial Condition ............... 7
-------------------------------------
PART II - OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders.. 14
------ ---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K .................... 14
------- --------------------------------
SIGNATURES ...................................................... 15
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- 1 -
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
INTRODUCTION TO THE FINANCIAL STATEMENTS
----------------------------------------
The consolidated financial statements included herein have been
prepared by Calgon Carbon Corporation (the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make
the information presented not misleading when read in conjunction with the
Company's consolidated financial statements and the notes included therein for
the year ended December 31, 1997.
The financial information presented reflects all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. The results for interim periods are not necessarily
indicative of results to be expected for the year.
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<PAGE>
CALGON CARBON CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
------------------------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................................................................... $ 72,636 $ 78,382 $227,857 $247,077
---------- --------- --------- ---------
Cost of products sold
(excluding depreciation).................................................... 47,256 48,463 141,918 151,434
Depreciation and amortization................................................. 5,405 5,169 16,266 15,884
Selling, general and
administrative expenses..................................................... 13,217 13,555 41,554 41,386
Research and development
expenses.................................................................... 2,227 2,203 6,363 6,154
Restructuring charges......................................................... 7,626 - 7,626 -
---------- --------- --------- ---------
75,731 69,390 213,727 214,858
---------- --------- --------- ---------
Income (loss) from operations................................................. (3,095) 8,992 14,130 32,219
Interest income............................................................... 62 96 149 266
Interest expense.............................................................. (1,196) (1,053) (3,642) (2,939)
Other income (expense)--net................................................... (503) (632) (1,323) (1,042)
---------- --------- --------- ---------
Income (loss) before income taxes
and minority interest....................................................... (4,732) 7,403 9,314 28,504
Provision (benefit) for income
taxes....................................................................... (1,799) 2,500 3,423 10,462
---------- --------- --------- ---------
Income (loss) before minority
interest.................................................................... (2,933) 4,903 5,891 18,042
Minority interest............................................................. 2 96 (36) 96
---------- --------- --------- ---------
Net income (loss)............................................................. (2,931) 4,999 5,855 18,138
Common stock dividends........................................................ (3,163) (3,175) (9,522) (9,523)
Retained earnings, beginning
of period................................................................... 170,702 166,284 168,275 159,493
---------- --------- --------- ---------
Retained earnings, end of
period...................................................................... $164,608 $168,108 $164,608 $168,108
========== ========== ========== ==========
Net income (loss) per common share
(basic and diluted)......................................................... $(.07) $.13 $.15 $.46
========== ========== ========== ==========
Weighted average shares
outstanding ................................................................ 39,640,247 39,690,290 39,708,147 39,680,872
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
CALGON CARBON CORPORATION
CONSOLIDATED BALANCE SHEET
--------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 6,059 $ 7,982
Receivables................................. 53,682 67,888
Inventories................................. 55,326 46,537
Other current assets........................ 16,187 16,731
-------- --------
Total current assets..................... 131,254 139,138
Property, plant and equipment, net............ 189,147 188,082
Intangibles................................... 78,936 80,971
Other assets.................................. 9,944 10,849
-------- --------
Total assets............................. $409,281 $419,040
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt due within one year.......... $ 16,222 $ 9,617
Accounts payable and accrued liabilities.... 34,891 47,563
Restructuring reserve....................... 12,300 6,282
Payroll and benefits payable................ 10,407 14,252
Accrued income taxes........................ 813 4,625
-------- --------
Total current liabilities................ 74,633 82,339
Long-term debt................................ 70,647 72,297
Deferred income taxes......................... 39,352 37,182
Other liabilities............................. 9,651 6,463
-------- --------
Total liabilities........................ 194,283 198,281
-------- --------
Minority interest............................. 1,309 1,378
-------- --------
Commitments and contingencies................. - -
-------- --------
Shareholders' equity:
Common shares, $.01 par value, 100,000,000
shares authorized, 41,503,960
shares issued............................. 415 415
Additional paid-in capital.................. 62,868 62,868
Retained earnings........................... 164,608 168,275
Cumulative translation adjustments.......... 9,703 7,889
-------- --------
237,594 239,447
Treasury stock, at cost, 2,327,200 and
1,761,300 shares.......................... (23,905) (20,066)
-------- --------
Total shareholders' equity............... 213,689 219,381
-------- --------
Total liabilities and
shareholders' equity................... $409,281 $419,040
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
CALGON CARBON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income........................................... $ 5,855 $ 18,138
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization...................... 16,266 15,884
Non-cash restructuring asset write downs........... 751 -
Employee benefit plan provisions................... 311 350
Changes in assets and liabilities - net of
effects from purchase of businesses, exchange
and non-cash restructuring asset write downs:
Decrease in receivables........................ 14,673 1,263
(Increase) in inventories...................... (7,728) (4,755)
(Increase) decrease in other current assets . 596 (4,974)
Increase (decrease) in restructuring
reserve...................................... 5,611 (276)
Increase (decrease) in accounts payable
and accruals................................. (19,771) 1,616
Increase in long-term deferred
income taxes (net)........................... 1,763 3,587
Other items--net................................... 786 (891)
-------- --------
Net cash provided by
operating activities......................... 19,113 29,942
-------- --------
Cash flows from investing activities
- ------------------------------------
Purchase of businesses............................. - (1,113)
Property, plant and equipment expenditures......... (14,492) (27,203)
Proceeds from disposals of equipment............... 269 368
-------- --------
Net cash (used in) investing activities.......... (14,223) (27,948)
-------- --------
Cash flows from financing activities
- ------------------------------------
Net proceeds from borrowings....................... 6,018 2,618
Treasury stock purchases........................... (3,367) -
Common stock dividends............................. (9,538) (9,522)
Other.............................................. - 539
-------- --------
Net cash (used in) financing activities......... (6,887) (6,365)
-------- --------
Effect of exchange rate changes on cash.............. 74 (799)
-------- --------
(Decrease) in cash and cash equivalents.............. (1,923) (5,170)
Cash and cash equivalents, beginning
of period.......................................... 7,982 15,439
-------- --------
Cash and cash equivalents, end of period............. $ 6,059 $ 10,269
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
CALGON CARBON CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Dollars in Thousands)
(Unaudited)
1. Inventories:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 13,708 $11,524
Finished goods 41,618 35,013
-------- -------
$ 55,326 $46,537
======== =======
</TABLE>
2. Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1998 1997
-------- -------
<S> <C> <C>
Cash paid during the period for:
Interest $ 3,649 $ 2,688
Income taxes, net of refunds $ 7,351 $ 7,841
======== =======
Bank debt:
Borrowings $ 20,022 $10,568
Repayments (14,004) (7,950)
-------- -------
Net proceeds from borrowings $ 6,018 $ 2,618
======== =======
</TABLE>
3. Common stock dividends declared during both quarters ended September 30, 1998
and 1997 were $.08 per common share.
4. In compliance with SFAS No. 130 "Reporting Comprehensive Income", total
comprehensive net (loss) for the three-month period ended September 30, 1998
amounted to $(806). Total comprehensive net (loss) was derived from net
(loss) of $(2,931) and other comprehensive income of $2,125. For the nine-
month period ended September 30, 1998, comprehensive net income was $7,669
consisting of net income of $5,855 and other comprehensive income of $1,814.
The only matter contributing to the other comprehensive income was the
currency translation adjustment.
5. Effective with the third quarter of 1998, the Company changed its method of
valuing inventory from the last-in, first-out method (LIFO) to the first-in,
first-out (FIFO) method. For a number of years the company has experienced
decreases in the cost of materials used in its production processes. The
decreasing cost environment has resulted in valuation of inventory above
current replacement costs and, if such trends persist, could lead to lower-
of-cost or market adjustments in the future. In addition, a survey of
principal competitors' financial reporting practices indicates that the FIFO
method is the predominate practice followed in the industry and therefore the
change will result in greater comparability for financial statement readers.
As a result, the Company believes that the FIFO method is preferable and will
provide more useful information.
The effect of the change in accounting principle was to increase net income
for the nine-month period ended September 30, 1998 by $.9 million ($.02 per
share) with virtually no change for the three-months then ended. This change
decreased net income for the three months ended September 30, 1997 by $.4
million ($.01 per share) but had virtually no effect on the nine-month period
then ended. The change has been applied to prior periods by retroactively
restating the financial statements.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of
------ --------------------------------------------------
Operations and Financial Condition
----------------------------------
This discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Selected Notes to
Financial Statements.
Results of Operations
---------------------
Consolidated net sales for the three-month period ended September 30, 1998
decreased $5.7 million, or 7.3%, versus the three months ended September 30,
1997. For the nine-month period ended September 30, 1998, consolidated net
sales decreased by $19.2 million or 7.8%. Refer to the table below for sales
detail by market, product and geography for both periods. These amounts are
in thousands of dollars:
<TABLE>
<CAPTION>
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
--------------------------- --------------------------
1998 1997 %Change 1998 1997 %Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Market
- ------
Industrial
Food $12,281 $14,438 -14.9% $ 36,874 $ 44,196 -16.6%
Chemical/Pharmaceutical 6,688 5,774 +15.8 17,491 19,859 -11.9
Original Equipment
Manufacturer 12,964 12,439 + 4.2 41,853 37,523 +11.5
Other 5,804 6,206 - 6.5 18,639 21,033 -11.4
------- ------- ----- ------- ------ -----
37,737 38,857 - 2.9 114,857 122,611 - 6.3
------- ------- ----- ------- ------- -----
Environmental
Municipal 13,459 15,663 -14.1 42,355 49,971 -15.2
Industrial 17,420 19,663 -11.4 54,366 57,752 - 5.9
------- ------- ----- -------- -------- -----
30,879 35,326 -12.6 96,721 107,723 -10.2
------- ------- ----- -------- -------- -----
Consumer 4,020 4,199 - 4.3 16,279 16,743 - 2.8
------- ------- ----- -------- -------- -----
TOTAL $72,636 $78,382 - 7.3% $227,857 $247,077 - 7.8%
======= ======= ===== ======== ======== =====
Product
- -------
Carbon $37,114 $39,899 - 7.0% $117,271 $120,199 -2.4%
Service 21,498 22,398 - 4.0 67,068 70,060 - 4.3
Equipment 10,004 11,886 -15.8 27,239 40,075 -32.0
Consumer 4,020 4,199 - 4.3 16,279 16,743 - 2.8
------- ------- ----- -------- -------- -----
TOTAL $72,636 $78,382 - 7.3% $227,857 $247,077 - 7.8%
======= ======= ===== ======== ======== =====
Geography
- ---------
United States $41,923 $45,031 - 6.9% $123,050 $130,147 - 5.5%
Europe 20,646 20,435 + 1.0 64,460 80,182 -19.6
Other 10,067 12,916 -22.1 40,347 36,748 + 9.8
------- ------- ----- -------- -------- -----
TOTAL $72,636 $78,382 - 7.3% $227,857 $247,077 - 7.8%
======= ======= ===== ======== ======== =====
</TABLE>
For the current quarter, sales to the Food market were down by $2.2 million or
14.9% due to the non-repeat of equipment sales to the cane sugar industry and
reduced demand (primarily activated carbon initial fills) from corn sweetener
customers. Sales to the Chemical/Pharmaceutical market increased by $.9
million or 15.8% due primarily to increased large equipment sales in the
United Kingdom chemical area. Sales to the Original Equipment Manufacturer's
category were up by $.5 million or 4.2% primarily due to improvements in the
United States personnel protection and home water filter categories. The
revenue
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<PAGE>
decline in the Municipal portion of the Environmental market of $2.2 million
or 14.1% was the effect of lower initial fills and potable water equipment
sales both in the United Kingdom and in the United States. Revenues to the
Environmental, Industrial category were below the third quarter of 1997 by
$2.2 million or 11.4% primarily due to the non-repeat of a few large carbon
and equipment sales that occurred in the 1997 period. The effect of foreign
currency translation on revenues for the quarter was negligible as European
sales were increased by $.4 million while sales in Japan were reduced by a
like amount due to these translations. Separation equipment sales declined
by $.8 million or 16.9% as the Company continues to perform required warranty
work on equipment in fabrication or shipped prior to the Company's acquisition
of the separation equipment business, which experienced product performance
and reliability difficulties. Sales of Charcoal Cloth products increased
62.3% in the third quarter of 1998 as compared to the third quarter of 1997.
Worldwide, oxidation equipment sales increased by 6.9% in the three-month
period ended September 30, 1998 versus the comparable 1997 quarter. Overall,
new product sales (sales of products introduced in the past sixty months) were
10% of total sales in the third quarter of 1998, virtually the same percent as
the comparable period in 1997. On a year-to-date basis, worldwide separation
equipment sales declined by 46.7%. Worldwide oxidation equipment sales were
consistent. Charcoal Cloth sales increased by 45.9%. Included in the decline
for sales to European customers was a decrease related to foreign currency
translation of $1.9 million. Excluding this adjustment, the European sales
decline would have been $13.9 million or 17.3%. For the nine-months ended
September 30, 1998, including the aforementioned translation related decline
in Japan of $.4 million, the net negative effect on revenues due to foreign
exchange translation was $2.3 million.
Gross profit, before depreciation, as a percentage of net sales, for the
three-month period ended September 30, 1998 was 34.9% compared to 38.2% for
the three months ended September 30, 1997. This 3.3 percentage point decline
was primarily the result of a less profitable mix of sales of carbon and
service products, reduced service sales which carry higher margin rates than
other categories and relatively stable fixed manufacturing costs versus lower
sales. Specifically affecting margin rates in the carbon category were
domestic sales of pulverized product to the municipal surface water area,
which carry a lower margin rate than the total, while margin rate declines in
the service area can primarily be attributed to reduced gross margins in the
chemical markets. The margin rate for separation equipment increased
moderately while the margin rate for oxidation equipment declined. For the
year-to-date period, this rate in 1998 was 37.7% compared to 38.7% in the
comparable 1997 period.
Selling, general and administrative expenses for the three-month period ended
September 30, 1998 decreased $.3 million versus the comparable period in 1997
and remained virtually the same when compared to the similar 1997 period.
Research and development costs remained level at approximately $2.2 million
per quarter of 1998. The relative stability of the amount of these expenses
reflects on-going cost control measures instituted by the Company during 1998.
Interest income for the nine-month period ended September 30, 1998 decreased
$.1 million versus the comparable period in 1997. Interest expense increased
$.1 million over the third quarter of 1997 and by $.7
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<PAGE>
million for the nine-month period ended September 30, 1998 versus the similar
1997 period due to higher utilization of short-term credit lines in 1998. The
interest rate at June 30, 1998 was 5.2%, no change from September 30, 1997.
The effective tax rate for the nine-month period ended September 30, 1998 was
36.8% versus 36.7% for the nine months ended September 30, 1997.
Net (loss) after taxes for the three-month period ended September 30, 1998 was
$(2.9) million. Excluding the after tax effect of the restructuring charges
of $4.8 million results in an income before restructuring charges of $1.9
million ($.05 per share) versus $5.0 million ($.13 per share) for the three
months ended September 30, 1997. The $3.1 million, or 62.2%, decrease can be
primarily attributed to reduced sales in the United States carbon related area
and in the separation equipment category.
Financial Condition
-------------------
Working Capital and Liquidity
-----------------------------
Net cash provided by operating activities was $19.1 million for the
nine months ended September 30, 1998, primarily from net earnings before non-
cash charges of depreciation and amortization and restructuring asset write
downs offset by increased investment in working capital.
The working capital increase was caused by increased inventory levels and
decreased payables and was partially offset by lower receivables. Inventory
increased $8.8 million to $55.3 million at September 30, 1998 due to increased
production output in connection with manufacturing productivity and softer
than expected sales relative to production. The Company expects to reduce its
inventory levels through higher fourth quarter sales volumes and use of its
new information systems to better balance product output with expected sales
activity. The restructuring reserve increased by $6.0 million to $12.3
million primarily due to the plan for restructuring announced during the
current quarter. Cash outlays for employee severance costs and benefits under
this plan totaled $1.1 million for the quarter. Savings under the plan due to
staff reductions are expected to approximate $1.0 million in the fourth
quarter. Cash provided from decreased accounts receivable was due to lower
current quarter sales as compared with fourth quarter 1997 sales.
Additionally, days sales outstanding, a measure of accounts receivable
turnover into cash, showed significant improvement to 67 days at September 30,
1998 from 76 days at December 31, 1997 which also contributed to lower
accounts receivable at September 30, 1998. Currently maturing debt and short
term borrowings increased $6.6 million to $16.2 million at September 30, 1998.
The net impact of foreign currency translation resulting from the weakening of
the U.S. dollar increased working capital by $1.7 million reflecting spot
foreign exchange rates at September 30, 1998 compared with December 31, 1997.
Total debt at September 30, 1998 was $86.9 million, an increase of $5.0
million, primarily to support working capital changes. The Company's unused
credit availability at September 30, 1998 was $37.6 million under its two 364-
day United States revolving credit lines and 25 million German Marks ($15.0
million) from its German credit facility. The Company expects to refinance or
renew its short term bank lines prior to their maturity in 1999.
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<PAGE>
During the third quarter 1998, the Board of Directors authorized an open
market repurchase program for up to 2,000,000 shares of Calgon Carbon common
stock. The Company acquired 565,900 shares at a cost of $3.8 million under
this program through September 30, 1998. (Included in this amount was $.5
million with an October 1998 settlement date).
The Company expects that cash from operating activities plus cash balances and
available external financing will be sufficient to meet its operating, share
repurchasing dividend and capital requirements.
Restructuring of Operations
---------------------------
During the third quarter of 1998, the Company initiated a worldwide plan
to reduce costs and realign the organization structure. The implementation
was begun in September 1998 and is expected to be completed during the second
quarter of 1999. This plan is expected to reduce costs by approximately $1.0
million in the fourth quarter of 1998 and by $10.0 million on an annualized
basis when fully implemented. The restructuring charges consist of the
following:
($000)
------
Employee severance and termination benefit costs $6,303
Asset write offs 751
Relocation costs and other costs 572
------
Total $7,626
======
With the exception of the asset write offs, these restructuring charges
require cash outlays. The number of planned employee separations is 131.
Separations through September 30, 1998 were 78.
In the fourth quarter of 1994, the Company recorded a restructuring charge
which included costs associated with the closing of the Brilon-Wald, Germany
plant. As of September 30, 1998, the only incomplete aspect of that plan is
the demolition of that plant as discussions continue with parties interested
in purchasing the plant.
The restructuring reserve balance at September 30, 1998 consists of:
($000)
-------
Demolition, disposition and environmental costs
associated with the closing of the Brilon Wald,
Germany plant in 1994 $ 6,558
-------
Employee severance and termination benefit costs
associated with the 1998 plan 5,212
Relocation costs and other costs associated with
the 1998 plan 530
-------
5,742
-------
Total $12,300
=======
The reserve balances are deemed adequate.
Capital Expenditures and Investments
------------------------------------
Capital expenditures for property, plant and equipment totaled $14.5
million for the nine-month period ended September 30, 1998 compared to
expenditures of $27.2 million for the same period in 1997. Investment in new
information systems accounted for $6.3 million of the 1998 expenditures while
$3.9 million and $2.8 million were expended on equipment which reduces
manufacturing costs in the United States and Europe, respectively. Total
capital expenditures are currently expected to be approximately $20.0 million
for the year 1998.
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<PAGE>
The 1997 purchase of businesses amount of $1.1 million includes an increase to
the purchase price for Advanced Separation Technologies Incorporated (AST) (a
1996 acquisition) of $.5 million and a net expenditure of $.6 million which
increased the Company's ownership percentage in Calgon Far East Co., Ltd.
(CFE), it's Japanese joint venture. The increased purchase price for AST was
due to a higher level of "Adjusted Closing Net Current Assets" than stated in
the purchase agreement. The purchase of business amount related to CFE was
effective July 1, 1997 and increased the Company's ownership of that entity
from 50% to 60% giving it a controlling interest. Cash expended for this
increase in control was $1.1 million and was partially offset by cash on this
entity's July 1, 1997 balance sheet of $.5 million resulting in a net purchase
of business amount of $.6 million.
Prior to the CFE ownership change, the balance sheet and income statement of
this entity were included in the Company's financial statements under the
equity method of accounting. Effective July 1, 1997, the financial statements
are consolidated into the Company's financial statements recognizing minority
interest on both the balance sheet and income statement. For this report, the
third quarters for both years and the nine months ended September 30, 1998
include these results on a consolidated basis while the nine months ended
September 30, 1997 include three months results on a consolidated basis and
six months activity on the equity basis.
Year 2000
---------
The Company has continued to address the Year 2000 issues related to
both information technology and non-information technology aspects. The
following discussion is a description of activities, results and expectations
on each of these fronts.
Information Technology
----------------------
To ensure Year 2000 compliance, the Company is engaged in a program
to modernize and replace its computerized production control and management
information systems. Although not the primary purpose of the program, the
new systems are scheduled to be in place by the second quarter of 1999 and
are expected to be Year 2000 ready.
A task force has been established to identify all other potential areas of
risk and to make required modifications as they relate to business computer
systems, technical infrastructure, end user computing, suppliers and
customers and manufacturing systems. All vendors associated with these
other areas of risk related to computer hardware, computer software, and
communications equipment/software have been surveyed regarding their Year
2000 compliance, and their responses are being analyzed. Further, all new
purchase orders for new software and/or hardware include a statement, that
by acceptance of the purchase order, the vendor is certifying compliance.
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<PAGE>
Included in this activity is the replacement of existing worldwide
information and human resource systems and the identification and
resolution of issues associated with personal computers and associated
software. These tasks are expected to be completed during the second
quarter 1999.
Other than the previously identified expenditures related to replacement of
its worldwide information systems, additional costs are not expected to be
material to the operating results.
Non-Information Technology
--------------------------
The Company has established a task team to identify and resolve the
millennium date rollover issues in its manufacturing processes worldwide.
This focus is on process related technology and other devices with embedded
microprocessors which are used to control the manufacturing processes or
operate security, communication or building services. The initial phase of
planning and awareness was completed in early 1998. The inventory and
assessment phases are underway and are scheduled to be complete by the end
of 1998. Detailed definition and implementation of solutions is currently
underway and will be completed in the first half of 1999. With this plan,
the manufacturing control systems are on-track to be Year 2000 ready in the
third quarter of 1999.
Compliance of devices is largely being established on vendor issued
statements. A third party consultant was employed to assist in organizing
the records and the initial round of vendor compliance checks.
The costs to address the Company's Year 2000 issues in manufacturing have
been estimated in the range of $.5 to $.8 million. These expense items
include third party consultant fees and costs to upgrade or replace non-
compliant devices. None of the components of the estimate were contemplated
for reasons other than Year 2000 readiness.
The task team is making efforts to ensure that all devices will be Year
2000 ready, however, since the assessment process is still underway, it is
not possible to guarantee the results at this point. It is not foreseen
that any of the manufacturing operations will not be ready and operable.
However, if a significant uncertainty arises at any time, a plan will be
developed to focus efforts on those devices critical to operation of the
production process(es). Devices that are informational only or non-critical
to operation will then be deferred until the process(es) operability is
ensured.
The Company would anticipate that the most likely worst case Year 2000
scenario, if one were to occur, would be the inability of third party
suppliers such as utility providers, telecommunication companies, and other
critical suppliers to continue providing their products and services. This
possible scenario could pose the most significant threat to the operation of
the Company's facilities along with associated environmental and potential
financial consequences.
- 12 -
<PAGE>
New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
standards for the way companies report information about operating segments in
annual financial statements and requires disclosure of selected information
about operating segments in interim financial reports issued to shareholders.
The Statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement
requires companies to report financial and descriptive information about its
reportable operating segments for periods beginning after December 15, 1997.
The Company is currently identifying its reportable segments and expects to
adopt the Statement and disclose segment information in the annual report for
the year ending December 31, 1998. Adoption of the Statement is expected to
impact only financial statement disclosures.
Other Matters
-------------
In a press release dated August 24, 1998, the Company announced that
it is suspending exploration of the sale of the Company. After examining
strategic alternatives and pursuing discussions with several parties, the
Board of Directors has concluded that it is in the best interests of
shareholders to pursue a course as an independent company. In light of that
decision, actions are being taken to refocus the Company on its core business,
the manufacture and sale of activated carbon products and services with
emphasis on new products as well as enhancing the performance of its recent
acquisitions.
A search committee has been formed within the Board of Directors and it has
engaged an executive search firm to help it to recruit a new chief executive
officer for the Company.
- 13 -
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(d) Exhibits
18 Letter from PricewaterhouseCoopers LLP regarding change in
accounting principles.
(e) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
September 30, 1998.
- 14 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALGON CARBON CORPORATION
-------------------------
(REGISTRANT)
Date: November 4, 1998 By /s/William P. Mooney
----------------------------
William P. Mooney
Senior Vice President and
Chief Financial Officer
- 15 -
<PAGE>
Exhibit No. 18
To the Board of Directors
of Calgon Carbon Corporation
October 19, 1998
Dear Directors:
We have been furnished with a copy of the Corporation's Form 10-Q for the
quarter ended September 30, 1998. Note 5 therein describes a change in the
method of determining the cost of inventories from the last-in, first-out
method to the first-in, first-out method. It should be understood that the
preferability of one acceptable method of inventory accounting over another
has not been addressed in any authoritative accounting literature and in
arriving at our opinion expressed below, we have relied on management's
business planning and judgment. Based upon our discussions with management
and the stated reasons for the change, we believe that such change represents,
in your circumstances, the adoption of a preferable alternative accounting
principle for inventories in conformity with Accounting Principles Board
Opinion No. 20.
We have not made an audit in accordance with generally accepted auditing
standards of the financial statements of Calgon Carbon Corporation for the
three-month or nine-month periods ended September 30, 1998 or September 30,
1997 and, accordingly, we express no opinion thereon or on the financial
information filed as part of the Form 10-Q of which this letter is to be an
exhibit.
Yours very truly,
PricewaterhouseCoopers LLP
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